Investment Highlights

• Bank Negara Malaysia (BNM) announced an OPR hike of 25bps to 2.00% from 1.75%. This was earlier than our expectation of a 25bps increase in the benchmark interest rate in 2H2022.

• The accelerated move appears to be in response to other central banks globally which have started to tighten monetary policies to lower inflationary pressures. A more aggressive tightening has been seen in the US with the Federal Reserve’s sequential increase in the benchmark interest rate by 50bps on 4 May 2022 after a 25bps rise on 16 March 2022. This has moved the Fed fund rate higher to 0.75%–1.00%. The effects of the hawkish rate hike expectations in the US have spilled over to bond yields in Asia, including MGS yields locally. This has resulted in the surge of the 10-year MGS yield to 4.4%.

• Domestically, the rate hike is seen as the beginning of the easing in our monetary policy accommodation.

• The MPC statement highlighted that the degree of normalisation in the monetary policy will be done on a measured and gradual manner. This is expected to be data-driven.

• With the stronger 1Q22 GDP growth, the pace of further rate hikes is expected to hinge on signs of further improvement in GDP growth in the subsequent quarters. Also, it will depend on whether there will be further escalation of inflationary pressures coming from the developments in the Russia-Ukraine war and the movement restriction measures in China affecting supply chains.

• We are now expecting another rate hike of 25bps, bringing the OPR higher from 2.00% to 2.25% in 2H2022.

• As we already imputed into our estimate of banks’ earnings a 25bps increase in the OPR earlier, we are now factoring in another 25bps hike into our projected net profit for banks for 2022. This has resulted in a modest increase to the fair values of banks (Exhibit 3). The changes have not affected our stock recommendations.

• Exhibit 3 shows the impact analysis of a 25bps OPR hike which will positively impact banks’ NIM by an average of 5–6bps and net profit by 3%.

• Retain our OVERWEIGHT stance on the sector with our top BUYs being RHB Bank (fair value RM7.30/share), CIMB Group (FV RM6.60/share) and Maybank (FV RM10.00/share). For mid-cap banks, we like Alliance Bank (FV RM4.60/share) and Bank Islam (FV RM3.90/share). We remain positive on the sector due to the interest rate uptrend cycle which will benefit banks in terms of interest income as well as room for potential write-backs in management overlays going forward. Also, valuations for RHB Bank, CIMB Group, Alliance Bank and Bank Islam remain inexpensive, trading below FY23F P/BV of 1.0x.

Source: AmInvest Research - 12 May 2022